I’ve constantly complained that there is no word in the English language for nominal shocks, i.e. unexpected increases and decreases in NGDP. (Or even expected changes, for that matter.) In contrast, there are simple words for rising and falling price levels; inflation and deflation. Interestingly, this language failure is mirrored by an analytical failure; when economists discuss Fed policy and nominal shocks they speak in terms of inflation and deflation, not rising and falling NGDP.

A good example occurred in late 2007 and the first half of 2008, when the CPI was rising at nearly 5%, but NGDP was rising by about 3%. Was this a positive nominal shock or a negative nominal shock? Based on NGDP growth, it was negative, as NGDP (or M*V) was rising by far less than the normal 5% rate. But economists who used the faulty inflation indicator (including some top officials at the Fed) concluded it was a positive nominal shock, as inflation was well above the 2% implicit target. Their mistake was in confusing supply and demand shocks. The high inflation in late 2007 and the first half of 2008 was due to a leftward shift in the AS curve, not an increase in AD.

So we need terms for changes in M*V, which is the sort of nominal variable the Fed should be trying to stabilize. I’ve tried to think up some new terms, but everything I came up with was almost laughably silly:

1. Monvelaire (for rising M*V)

2. Monvelump (for falling M*V)

I think you see the problem. Anyway, Matt Yglesias has a better idea, we should simply steal the term ‘inflation’ from the bad guys:

Anyone have any other ideas for terms representing rising and falling NGDP?

PS. I will be traveling quite a bit over the next few weeks, so I won’t do much blogging for a while. I hope to pick up my previous pace (i.e. before getting distracted by the manuscript revision) by mid-May. I have a big backlog of things that I haven’t had time to comment on, as the manuscript has taken up most of my time. I plan to read Amity Shlaes’ book on the Depression while traveling, so I’ll do a review when I have time.

Also, there isn’t a simple term for inflation below the 2% trend (or whatever.) I suppose disinflation comes close. On the other hand, what about moving above the 2% trend? Isn’t the only term the complicated one of “accelerating inflation?”

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
-Ernest Hemingway

Can’t we just use some acronym or portmanteau of “the positive or negative derivative of NGDP”? Are “plus-d(NGDP)” and “minus-d(NDGP)” to unwieldly?

How about “up-PO” and “down-PO” instead, where “PO” means nominal output? Here are two words with just two syllables each? If we want to change them into verbs, we can instead say “to PO-up” and “to PO-down” to mean nominal output is rising or falling.

Don’t use inflation/deflation, you’ll get lost in the confusion before you gain control of the words.

How about “drag” and “pull”? Drag has a clear negative connotation, we should obviously avoid NGDP dragging on the economy. Pull isn’t as clear, but it still works — “we need NGDP to pull on the economy to get it going”… or “NGDP is pulling too hard on the economy, and overheating it”.

Serious idea: Growth and Recession. The labels are already there. “The economy experienced 5% growth.” “Growth slowed to 1% in the 3rd quarter, but Fed Chair Sumner has pledged to increase monetary stimulus to bring growth back up to 5% in the 4th quarter.” “During 2007, the economy experienced a 3% recession.” Recession has always been a delightfully undefined term, so there wouldn’t be much confusion. Economists nearly always make sure to emphasize that they are talking about ‘real growth’ instead of ‘growth’ so there wouldn’t be much confusion there.

You could go with something like despair and delusion. This has the benefit that both words have negative connotations, so people seeing the economy being described as either will be predisposed to action (which, in this case, is controlling NGDP).

Maybe use terms from thermodynamics and bulk-flow physics (kind of appropriate actually, since we’re talking about aggregate quantities and speeds).

Maybe “Convection” for NGDP-up (hot material moving around fast and with high volatility and turbulence), and “Compression” for NGDP-down (what happens when things cool down and freeze up).

Convection and Compression, hmm… they have a nice ring to them, and sound almost technical and scientific and not at all laughable. They even take modifiers and superlatives well “A high-Convection environment. Hyper-Convection. Hypo-Compression, Ultra-Compression, etc…

I’d like drag and pull because these suggest forces, and we’re talking about an acceleration: a change in a rate of change. If the line is straight, d(NGDP)/dt is constant, d^2/dt=0, no force applied. (More directly, we’re talking about force as a change in momentum. It’s all very Newtonian, really.)

Why not stick with positive and negative demand shocks? Not one word, but simple, intuitive, and corresponds with what people already learn from textbooks about shifts in AD and AS.

Inflation and deflation I think are just too well established, plus you would then need a new word for rising and falling prices. (Haven’t the Austrians already tried to steal “inflation”, with minimal success?)

What shall we call changes in nominal gross domestic product?
I’ve constantly complained that there is no word in the English language for nominal shocks, i.e. unexpected increases and decreases in NGDP. (Or even expected changes, for that matter.) In contrast, there are simple words for rising and falling price levels; inflation and deflation. Interestingly, this language failure is mirrored by an analytical failure; when economists discuss Fed policy and nominal shocks they speak in terms of inflation and deflation, not rising and falling NGDP.

Scott,

I think the reason is mirrored in economic reality: while people experience price inflation and deflation in their daily lives, and employment (and sometimes unemployment), as well as profits and losses (investors do), they don’t experience NGDP, whatever that actually means. And I think it’s more or less a meaningless concept. GDP (forget the N) is, as Mises pointed out many times, simply a number made up by top down socialist planners (and let’s face it: that’s what government bureaucrats in DC [a k a Sin City] are).
What on earth does it mean to add up the zillions of disparate goods and services, multiply them by an exchange value, and quantify that meaningless “number”?
And I hope you don’t take the numerous Wall Street economists seriously, who write learned briefs predicting a rise or fall in GDP by x.y% next quarter or next year.

M x V = P x T might mean something to an economist, but not to Ma and Pa Kettle. Nor to Rothbard, if memory serves, in _Man, Economy, and State_. And I’m still chewing a bit on Woolsey’s points about the macro causal relationship of elasticity of demand and supply (I think it’s problematic, but I only skimmed his two posts on ABCT at his blog). Rothbard repulsed the concept of elasticity of supply in MES. I need to have a look at it again, which I’m going to do later.

Scott- Off topic, but if you haven’t read Christina Romer’s recent speech, you should do so. Here’s a quote:

“The recent recession was obviously not caused by tight monetary policy. Interest rates were not especially high when it began, and so the Federal Reserve had only limited room to cut them. It has brought short-term rates down to virtually zero, but it cannot push them below that. The result is that we have not had the strong monetary stimulus that we would normally have in these economic circumstances.”

Why not ‘expansion’ and ‘contraction’? Could we say that there is economic expansion when the growth in aggregate demand (NGDP) exceeds the inflation rate and contraction when the growth in aggregate demand is less than the inflation rate?
I think this terminology would help to head people in the right direction in thinking about what makes monetary policy expansionary or contractionary.

I don’t believe growth and recession are already reserved for the reals. Most economists are still very careful to put “real” in front of growth, and recessions are not yet defined in any meaningful fashion. If you have to put nominal in front of it, okay, but the victory will be when people forget to do so.

Awhile back we talked about reframing the nominal income targeting approach by saying the Fed should stabilize total cash spending. That is so intuitive and should be understood by most folks.

Consequently, in terms of what is a nominal spending shock we can simply say “There has been a sudden collapse in total cash spending” for a negative AD. Alternatively, we can say “Total cash spending is increasing at an unsustainable pace” for a positive AD shock.

Everyone, Thanks for all the comments. A few observations, as I am travelling and don’t have much time:

I was hoping for a single term, the equivilent of ‘inflation’ and ‘deflation.’ The terms ‘convection’ and ‘compression’ might work. Actually I’m not a scientist, so “convection” means little to me. But I really like compression. I think the basic problem during NGDP contractions is that nominal contracts are set up for X% growth in NGDP, and if nominal spending is less than X% then the lower nominal spending must be compressed into existing nominal contracts (and existing expectations.)

Ideas like nominal growth and nominal recession are OK, but I wonder if people would confuse the two types of recessions. Ideally (as with wages and interest rates) NGDP would be the default “GDP” and if you meant “real GDP”, you’d have to say it explicitly.

I still think the best option is simply to steal ‘inflation’ and ‘deflation.’ After all, when people say “the Fed ran a deflationary monetary policy,” they mean a policy that reduced NGDP (or at least the growth in NGDP.) Suppose NGDP kept growing at 5% and there was so much productivity improvement that prices fell 1%. Would anyone say the Fed is conducting a deflationary monetary policy if RGDP was growing 6% and NGDP 5%? I don’t think so. So let’s talk about what we really mean when we refer to the Fed conducting inflationary or deflationary policies.

“I think the basic problem during NGDP contractions is that nominal contracts are set up for X% growth in NGDP, and if nominal spending is less than X% then the lower nominal spending must be compressed into existing nominal contracts (and existing expectations.)”

YES, that is the basic problem – essentially, that most private contracts (e.g. debts) are not inflation indexed – but if they become inflation indexed, that’s fairly consistent with de-anchoring.

Maybe we should focus on coining a term that does not talk about the level relative to 0%, which is somewhat meaningless, but relative to a target expectation level which is embedded into most contracts. The closest thing I’ve heard is “disinflation”, which suggests inflation between 0% and 2%.

Alternatively, focus on something that implies over or undershooting a target rate. Inflation/Deflation don’t imply that.

Statsguy, I agree we don’t want to imply that the target is zero, instead there should be a connotation that either over or under the target is bad.

SSumner, you’re right, convection isn’t a good analog, but compression is. I’m trying to find a good antonym for compression but the obvious one, expansion, is already overused.

Another requirement should be that the terms are not already used in common colloquial speech — they must be technical terms that can resist abuse. For this reason, overheating and underheating would be poor choices.

I think these terms convey that some excitation is desirable, but by using over/under it is obvious that the level is not ideal.

I’ve borrowed these terms from my technical discipline, by the way, which is electric motor control. They correspond almost exactly too, which I’ll try to explain. You need a certain amount of excitation to run (some kinds of) electric motors. The motor will work if it’s over- or under-excited, but not ideally. Excitation is the current applied to the windings of the motor’s rotor, to create the magnetic field against which the stator’s magnetic field acts to turn the rotor. (Rotor = part that rotates, stator = part that stays still) Uh… that’s probably impossible to follow! Basically, the excitation doesn’t turn the motor, it just provides something to push against so the stator can turn the motor.

This is also how I see the function of money in the economy: it doesn’t directly make you richer or poorer, you just need the proper quantity of it to push against.

I’ll pick up after my last brief comment. If I didn’t address your point made earlier, feel free to revive the argument.

Statsguy, Yes the deflation/disinflation distinction is one point of confusion. But then we also must distinguish between lower than expected inflation, and lower than expected NGDP growth. I think the terms you propose might sound a bit too esoteric to catch on.

ohwilleke, You said;

“Normally, hearing it on the radio or TV, I would assume that mere “Growth” is NGDP increase, while “Real Growth” with be RGDP increase.”

You’d think so, but in fact when the media says “growth” they almost always mean “real growth” even if they don’t include the word ‘real.’ It is what makes it so confusing.

jj and Neil, ‘Expansion’ would be good, if it wasn’t already taken for real GDP growth. In practice I think we either need to steal the terms ‘inflation and disinflation’ or else use two terms, as some have suggested (nominal growth, etc.)

D. Watson, I’ll take a look.

Winton and Doc, Actually late 2008 is when NGDP really imploded. The two terms might work, but they are a bit too colorful for the distinction between 4% and 6% NGDP growth.

Philo. 12 days to be precise. I am up and running again, but will travel to Oxford in 10 days. Although given that I have a stopover in Iceland, who knows if I will make it.

D. Watson, I don’t have strong views on those regulatory issues. For me the key is not regulatory, it is getting economists (inside and outside the Fed) to understand the role of unstable NGDP in financial crises. We need to change the mindset of monetary policymakers—if we do then much of the regulation will not be needed.

Leave a Reply

Name (required)

Mail (will not be published) (required)

Website

Search

About

Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...

Bio

My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis.